Summarize the student loan industry. Answer with respect to both public and private loans and be clear as to which you are referring to. a) What led to the inception of the student loan market? The inception of the student loan market started like any other loan market, there were a large amount of borrowers who needed money now to invest in college to make more later that were matched with lenders who had excess funds and wanted return on the funds. The National Defense Education Act of 1958 which provided loans to students in higher education institutions started the student loan market.
This was supposed to help train students to get jobs that will help them succeed and in turn help our nation succeed. b) What major changes have occurred over the years? The biggest changes in the loan industry have been the recent dramatic increase in enrollment at colleges. An alarming trend in the last twenty years is that appropriations to universities per full time student are going down while public four year tuition and fees are increasing. Total outstanding student loan debt, number of student borrowers and average debt per borrower has been steadily increasing over the last decade.
Recent changes include private lenders becoming less inclined to lend. b. i) Since 2004 both the number of student loan borrowers, and the average balance per borrower has steadily increased, according to data compiled by the Fed New York (b. i. 1) 2004 25-year olds with student debt was just over 25%; grown to more than 40% (2013) (b. i. 2) 2012 Number of student loan borrowers totaled almost 40M and the average balance per borrower was slightly less than $25k (b. i. 2. a) 40% had balances less than $10k; 30% had balances between $10k and $25k; 4% over $100k c) What is the current source of financing?
c. i) $1T financed by the federal government c. ii) $. 2T financed by private lenders (c. ii. 1) They are lending less c. iii) Federal (c. iii. 1) Make up about 85% of the total student debt outstanding (c. iii. 2) 93% of all new loans continuing to increase since the Recession (c. iii. 3) Credit Check not required but may be turned down if they are delinquent on existing student loan (c. iii. 4) 21% were delinquent 2012 c. iv) Private (c. iv. 1) Private student loan market includes loans made not only by banks, but also loans made by credit unions, state agencies, and schools themselves (c. iv.
2) Makes up about 15% of the total student debt outstanding (c. iv. 3) 2008 was $25B 2012 it is $8B since Recession (c. iv. 4) Credit Check, full underwriting guarantor (90%) (c. iv. 4. a) Underwriting has stricken since (c. iv. 5) 4% are delinquent 2012 (c. iv. 6) Tough to restructure c. v) Both often have a 6 month grace period d) How are lending decisions made by lenders in today’s world? For private lenders, lending decisions today have tightened dramatically since the recent economic recession, and it seems as though they are ducking out of the student loan industry because of all the bad loans they have on their balance sheets.
Federal lenders have gone the complete other way; they do not have stringent requirements for the loans that they are handing out. Borrowers are encouraged to max out their federal lending before they go to their private lending. e) How are borrower decisions made by borrowers in today’s world? They have very little choice when choosing alternatives for student loans, these options include private lending and federal lending. A borrower should max out their federal loans then go on and be as prudent as they can when selecting a private loan.
There is also a lack of transparency that makes it difficult for borrowers to pick private loans after they have maxed out their federal loans. Therefore the decisions are incredibly difficult to make after you max out your federal loans. Every student should be diligent and use all of the options that are set in question number three to make the best borrowing decision as possible. f) What is the size of the market today? How has its size evolved since its inception? f. i) Same statistics listed in 1c are relevant here f. ii) How has it evolved since its inception? The Market size of student loans is $1.
2 Trillion, private accounting for $0. 2 Trillion and federal accounting for $1 Trillion. Student Loans taken out have been increasing, student loan debt outstanding has been increasing and average student loan debt per borrower has been increasing. Some believe that these may cause problems and increase outstanding debt and defaults which taxpayers have to pay. While government professionals may believe that taking a hit now to help consumers get higher paying jobs may be worth it in the long run so they can start consuming. 2) How have student loans been treated in bankruptcy historically and today?
a) Include in your answer information about how the treatment impacts lending b) Include in your answer information about how the treatments impacts the economy c) There is some controversy here why does that arise? d) What might happen if the laws changed? Before 1976 student loans were dischargeable in bankruptcy; this policy did have some loopholes though and when it comes to loopholes in money you do not want to leave many. Student loans stopped becoming dischargeable because they were afraid that the students would take advantage of the opportunity to file bankruptcy and rid themselves of student loan debt and drain the system.
Disallowing the discharge of student loan debt helps to increase incentives for lending since borrowers are stuck on the hook and have to pay it back; this makes the lenders feel more comfortable and increases their willingness to lend. This can have multiple impacts on the economy because if student loan borrowers are no longer able to file for bankruptcy on their student loans you are more likely to have a generation of student borrowers that cannot pay their debts. If students graduate with a large amount of debt they are less likely to be consuming products like mortgage or car loans which help our economy run more efficiently.
Some student borrowers may end up not borrowing because of the increased risk due to no bankruptcy. Lastly, a horrible scenario may be that lenders know that student loan borrowers cannot default therefore they hand out loans for anyone that wants them because the lender knows they will be stuck on the hook. This has horrible ramifications because one should never lend when they do not believe the borrower will be able to pay them back. 3) Outside of bankruptcy, what ways of dealing with non-payment of student loans exist? How might each affect the economy? a) Students who cannot pay off their student loans can a.
i) Talk to your high school financial aid office a. ii) Shop for lower interest rates and loans that offer flexibility a. iii) Do not believe the rates as stated because they are stated for the highest credit scores a. iv) Fill out a FAFSA a. v) Search for scholarships a. vi) Apply for income-based repayment plans (must meet criteria of the Department of Education “partial financial hardship” (a. vi. 1) Could be 10-20% of discretionary income depending on how you apply a. vii) Enter public service such as teaching or other government jobs and you can discharge your loan after 10 years of making regular payments a.
viii) The right to change payments from 10 years to 25 years decreasing your monthly payment while increasing the interest payment b) Some worry that people are taking advantage of some of the above options for student loan debt and are hurting the economy c) If I were a future student loan borrower I would try to get my loan in as quickly as possible and enjoy the lower rates because there is reason to believe that the rate can go up since it is now attached to 10-year Treasury Notes student loan delinquency can really take a hit on your credit score.
Whenever someone defaults on a student loan the burden falls on the taxpayers of the country. If students found ways to get out of their student loan debt they would end up leaving the taxpayers to pay it off for them. There is reason to believe that being more lenient on student loan delinquency will allow students to finish their education and get a job that will allow them to pay off their student loan and eventually put more money into the economy. One notable solution that I found interesting was to hold schools accountable for their students.
Schools that receive subsidized loan money could be left on the hood for a percentage of the loan balance if the student defaults. This would encourage colleges to pick the best applicants that they believe will finish school with a degree that will allow them to get a job that will pay off their student loan and hopefully buy a mortgage and lease a car to help the economy run more efficiently. 4) What is the impact of the existence of student loans on universities and tuition? a) The existence of student loans results in demands on universities – what are these?
Universities are positively impacted by the existence of student loans because without them they would have to exponentially lower tuition. This is the same logic that universities have used to raise the price of their tuition. It is simple supply and demand economics, Joe Schmoe high school graduate gets into a fancy college that costs $40k a year and Joe can easily get a loan. Fancy college gets excited and realizes that the demand for the college is not as affected by price change as they might expect and they raise their tuition until finding the optimal price.
The overall impact of this raised tuition is that students will have to take on larger student debts to be able to afford tuition at these universities. The larger loans that student takes the more likely they will end up delinquent on their loans. When students are delinquent on their loans they may end up going into default or not finishing school. In both situations the students end up negatively affecting the economy because the delinquent could end up having taxpayers pay for their defaulted loan and the college dropout will be less likely to pay off their loan due to low income opportunities with no college degree.
5) What is the relationship of student lending to other forms of lending? a) For the first time in years a. i) Outstanding student loan debt is greater than outstanding credit card debt (a. i. 1) Student Loan debt is second only to Mortgage Debt a. ii) 30 year olds with student loans are now less likely to take on housing debt than 30 year olds without student debt a. iii) 25 year olds with student loans are now less likely to take on housing debt than 25 year olds without student debt b) Since the peak in household debt in the third quarter of 2008, student loan debt has increased by $293B b.
i) Other forms of debt fell a combined $1. 53 trillion b. ii) Only form of debt to substantially increase since the 2008 crisis b. iii) Mortgage balances shown on consumer credit reports dropped (b. iii. 1) Originations are 17. 4% below Q1 2011 b. iv) Credit Card Balances 21. 6% below Q4 of 2008 c) 15% of delinquent student loan borrowers also have delinquent auto loans, 35% have delinquent credit card debt and just over 25% are delinquent on mortgage payments The bottom line is if students are leaving school with
more debt, than they will be less able to take on more loans in the housing, credit and auto loan industry, which help power our economy. Two things can end up happening, student loan borrowers will be turned down when seeking lending in the auto or mortgage industry because of the stigma attached to student loans. Another possibility is that a small but significant amount of students take on multiple loans during college and accumulates large amounts outstanding debt in all areas.
The most important and repeated statement of this paper will be that the taxpayers will have to pay the loans when students default. 6) What Fed actions (during the past decade) have impacted the student loan industry? & 7) Why is the Fed concerned about student loans? What is its actual role here? The Fed is concerned about student loans because it is now the second largest form of outstanding debt and it has been growing. There is reason to believe that it will continue to grow due to low employment encouraging people to stay in school or go back to school.
Another pressing concern is that a large amount of these student loans are federally insured and could increase the budget deficit. And to reiterate the most important factor that when students default on their student loans, the burden will be placed firmly on the lap of the taxpayers. The role of the Federal Reserve Bank is to supervise participants in the student loan market. Supervision of participants in the student loan market is similar to their supervision of other retail credit markets and products meaning they are able to go over what you buy aka Student Loans bought by private institutions.
Institutions subject to Federal Reserve supervision are “subject to onsite examinations that evaluate the institutions risk-management practices, including the institutions adherence to sound underwriting standards, timely recognition of loan deterioration and appropriate loan loss provisioning, as well as (to a limited degree) compliance with consumer protection standards. Many of these institutions have significant student loan portfolios. ” A large concern the Fed may have about student loans is that of the relevant information (relevant statistics) about student loans are unknown.
In the finance world investors are willing to pay for a larger degree of certainty so this proposes a large problem. One action the Fed took was deploying Capital Analysis and Review (CARR) “which is a supervisory tool that the Fed deploys to enhance financial stability by assessing all exposures on bank balance sheets. Large US banks are strongly encouraged to be forward looking and account for unique risks and keeping sufficient capital so we can continue operations during time of economic and financial distress.
” The large US Banks that CARR searched found that they held $63B in government and private student loan debt outstanding $26. 3B of which is outstanding. The Federal Reserve also developed guidance outlining loan modification procedures with the Feral Financial Institution Examination Council which discusses how banks should engage in extensions, deferrals, renewals and rewrites of closed-end retail loans (including private student loans). They encourage that any restructuring should be based on renewed willingness/ability to repay and must be consistent with the banks policies.
They note that lenders should work with borrowers who have a legitimate claim to financial hardship. These concerns are shared with the OCC and FDIC; they are even allowing institutions to go against GAAP. The Federal Reserve is really helping borrowers and investors by encouraging lenders to be as transparent as possible. Information should be clear and easily accessible to borrowers and should include information on how to contact the lender or servicer to discuss the programs that might best fit their specific needs.
Courtney from Study Moose
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